However, the rally has quickly lost steam and oil prices moved away from their recent highs as traders have started to “sell the news”.
Taking a look at recent history, “tensions in the Middle East” had limited impact on physical flows of oil from the region. Surely, oil’s geopolitical premium increases during conflicts in the region, be it the Hamas attack on Israel or Houthis’ attacks on ships.
However, physical flows remain the ultimate catalyst for oil markets. If oil tankers are not disrupted and oil production facilities continue to operate as usual, oil prices pull back after the initial rally.
This time, the situation looks more serious than usual as Israel and Iran have engaged in direct conflict. That said, the countries do not share a border on land, so they will be limited to rocket and drone strikes against each other.
It remains to be seen whether such strikes (in case the escalation continues) will have a material impact on Iran’s oil production. If there’s no impact on production or delivery roots over the weekend, oil prices may find themselves under pressure.
It should be noted that oil prices are up by more than 30% from May lows. The rally was strong, so many investors want to take some profits off the table. If the conflict between Israel and Iran drags on but does not impact oil flows, it may even serve as a bearish catalyst for oil markets by hurting economic growth.
